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Arnold Kling is poised to lose his bet that America is headed towards becoming a One-Party State. Nonetheless he says
I still think that the 2010 election will turn out to be an outlier relative to the trend line. I think that if President Obama had not appointed Tim Geithner and re-appointed Ben Bernanke, he could have positioned himself and his party as reluctant participants in the bailout. Instead, with Geithner and Bernanke, Obama made the bailouts and the Democrats inseparable. ,
Take away those appointments, and the whole dynamic of this election could be different. The public is saying, "We hate the bailouts." The Democrats are stuck saying, "You are stupid and irrational." Without Geithner and Bernanke, they could be saying, "You’re right. We wanted something totally different.
This represents a completely different view of electoral politics than I have. I am not sure the bailouts really mattered. I tend to think if it hadn’t been that then the entire focus would have been on the stimulus. If there hadn’t been a stimulus then it would have been about ObamaCare. If there had been no ObamaCare then it would have been about how Obama is a do-nothing President who promised change and delivered the same old Washington as usual.
In short, I don’t think politics has very much to do with policy.
I also don’t see how a one-party state is sustainable in the long-run. Its going to be in someone’s interest to break-up the current coalitions into something else.
My guess is that the evolution would move towards the social wars and Black and Hispanic social conservatives would peel-off into the GOP. However, my general take is not that there would be some particular schism but simply that the incentives are ripe for schism.
Yet, while I think politics and policy are fundamentally different beasts, it is the case that policy can become a political litmus test. Politics is largely an expression of tribalism: Us vs. Them.
However, how do you decide if someone is really Us or Them. One way is simple membership in an ethnic group. One way is being from a particular part of the country or having a particular accent. This is why one party democracy is possible where there is a strong ethnic majority that fears outsiders as in the case of Singapore and Japan.
In a multi-ethnic society, however, a key way identify your group membership is by supporting policies that are ostensibly “pro-Us."
This is why things like TARP get to be footballs. I admit that there is a pointy-headed debate over the merits of TARP. One can feel that TARP set the stage for a larger government power grab or that it prolonged moral hazard or that it was too kind to the banks, etc. However, I don’t know that pro and anti TARP pointy-heads fall neatly into conservative and liberal camps.
Moreover, I think most of the pointy heads are at least sympathetic to TARP as a real-time decision. Am I going to far to suggest that even if Arnold thought at the time TARP was a bad idea, he could still see why even very pro-market pro-emergent order people might be for it? If you give even a little credence to the world-wide economic collapse story then you can see how the aftermath of such a scenario would not be a friendly place for classical liberals.
Nonetheless, TARP makes for a good football. It signals that one is either pro or anti activism. ObamaCare, likewise does the same. Activism is generally good for the rising demographic and bad for the falling demographic. Thus, supporting TARP and ObamaCare naturally signals that you are with the Democrats and against the Republicans, irrespective of who actually created the policy or the merits of the policy itself.
Matt Yglesias notes
I find [arguments that Sarah Palin is unelectable] to be not all that convincing. John McCain was a widely admired war hero with a reputation for moderation who had favorable ratings well over 50 percent on Election Day and he lost to a first-term senator with a black nationalist spiritual mentor. Palin isn’t the most formidable candidate out there, and in a very close election her flaws could easily deny the GOP the White House. And very close elections do happen—think how important the 2000 presidential election was in retrospect. But most elections aren’t that close, and if the fundamentals are strongly against Obama—which they may be—Palin will beat him.
I think the dirty secret of conservative Palin skeptics is that they think Sarah Palin would be a bad president.
By my reading what has happened is that the conservative movement has outsourced its elitism to the media. Rather than simply say “This woman is unqualified and we will not support her” they say she’s unelectable and that the media will trounce her.
You may have certain moral objections to this but given the constraints on the GOP, its not all bad. Many European countries outsource their elitist policies to the European Union. This is the only way they can hold their electorate together and beat back what they see as bad policy. Similarly this may be the only way GOP elites see that they can beat back bad candidates.
The alternative, one should note, is not a GOP that openly accepts the elitist argument but one in which all the elites are purged. If you believe – as it seems Matt does – that eventually the opposition party will win an election no matter who it is composed of then you want the opposition to be as high quality as possible. This means keeping the elites inside the tent.
Neil Irwin suggests that Bernanke’s fears are that of man who is acutely aware that he has something to lose.
But should the Fed overshoot in its plan to pump hundreds of billions of dollars into the economy, it could produce the same kind of bubbles in the housing and stock markets that caused the slowdown. Or the efforts could fall short and fail to energize the economy, leaving a clear impression that the mighty Fed is out of bullets – thus adding even more anxiety to an already dire situation.
Just two years after the world financial system nearly collapsed, it is again gut-check time for Bernanke.
I understand the temptation, I do. However, when FOMC members put on their suits and go into work they are no longer private men and women. They are public administrators. Privately, they are very impressive individuals with resumes that have landed them at the seat of power. Yet, as administrators they are failing miserably.
The members are acutely aware of the dual mandate and that it is not being met in either respect. Prices are too low and unemployment is too high. This is by definition, failure.
Conservatism has its place and is deeply important for an institution invested with as much power as the Fed. However, it is not time for conservatism when your current actions are resulting in a clear and immediate policy failure. No speculation is required. No wistful dreaming of an America built anew.
It is enough to simply look out of the window and see that this America – the one we are currently in – is broken; and it is broken in precisely the way that decades-old analysis would predict. It is broken exactly as Japan was twenty years ago.
In those two decades the basic advice that was offered to Japan has not changed – promise to inflate. So now, in this moment, we should without trepidation do what we advised so many years ago.
Promise to inflate.
Dean Baker is fond of blaming journalists’ pro free trade bias (which they supposedly have) on the fact that they are a protected professional class because of the limits on skilled immigration, and that without those protections their jobs would be subject to more foreign competition like manufacturers are. With all due respect to Felix Salmon, Andrew Sullivan, and all of our other imported foreign pundit labor, I always doubted the extent of this argument. After all, local knowledge, understanding the cultural, and language barriers represent significant barriers to entry for journalists and pundits. At the very least competition from developing countries will be limited; it’s not like the New York Times could move it’s operations to China and start operating from there. In short, while I believe there would be some impact, I don’t think removing all legal protectionism for journalists and pundits wouldn’t amount to all that much more competition.
That’s what I thought until I read some reactions in China to American elections courtesy of the New Yorker. Allowing perhaps to the distance and detachment from the issues, the insightfulness in the analysis easily surpasses many bloggers and pundits. For instance, there is this “common” reaction to the anti-China election ads we’ve been seeing:
“A country that couldn’t be any weaker is always emphasizing its rising clout, while a truly powerful country is always dwelling on its weakness and vulnerability—how ironic.”
That’s exactly correct, and a better take on it than the average blog post or op-ed on the topic.
And there is this perfectly calm and reasonable analysis of the Tea Party which I think is much more judicious and far-sighted than the average American pundit analysis, so much of which is exaggerated:
The Tea Party is a product of a certain period of time,” as a recent piece from China National Radio put it. “As the economy gets back on track, with more income and more stable jobs—when the country is richer, and people will be more at ease—the Tea Party will probably not have as many supporters. This is a bit like those radical anti-war organizations that popped up in America in the past. After some time, their voices faded out. When that day comes, we will realize that the Tea Party movement had pushed forward some rather insignificant figures in the world of American politics.”
I think that’s exactly right, and history will prove China National Radio correct… did I just write that? In any case, and perhaps due to the detachment, it’s also far better analysis than the average blogger or op-ed.
This raises a question: will my blogging be outsourced? Well, since my blogging wage is $0, I cannot be underbid. Also, for the time being I presume my particular brand of moderate libertarianism is probably illegal in China.
I could however, be replaced by a blogger from India or another country with more freedom of speech. Putting me at a disadvantage compared to anti-trade liberals and conservatives is that if I am replaced by foreign competition I will be unable to complain, ask for protectionism, or appeal to any sort of nativist favoritism without also simultaneously exposing myself as a hypocrite and thus destroying my blogging career anyway.
I’ve previously posted my skepticism about the fact that British “austerity” is going to have any real effect on the economy. Now, courtesy of Josh Hendricksen, we have evidence that intentions of fiscal contraction (remember, it’s expectations that count, not the current setting of policy…even for fiscal policy) pale in comparison to an accommodative monetary policy…but first, and important quote from Josh.
…I suggested that the best way to assess monetary policy is by comparing the target variable to the target. This is the only proper way to evaluate the stance of monetary policy. Interest rates and monetary aggregates might be useful guides, but they are only intermediate targets. An explicit target is also important because it helps to anchor expectations.
Now, on to the meat (from the WSJ):
Another quarter, another surprisingly strong U.K. growth figure. Growth of 0.8% in the third quarter smashed the consensus estimate, pitched at just half that level, and also demolished any thought that the Bank of England might move towards more quantitative easing at its meeting next week. The U.K. economy is looking resilient.
[...]
The U.K. economy has now expanded 2.8% in the last year, a little above the average for the pre-crisis decade of 2.6%. Encouragingly, growth is broad-based across services, construction and manufacturing; the latter has now racked up annual growth of 5.3%, the strongest year-on-year rise for 16 years, Barclays Capital notes. Despite concerns, service-sector growth held up at 0.6%, the same pace as the second quarter. Indeed, worries that the U.K. is experiencing a particularly bumpy recovery are starting to look overdone. That should help unlock corporate spending and hiring.
The important thing about fiscal policy is to note the monetary policy reaction function. The Bank of England has signaled that it is willing to be accommodative, and thus, you can move fiscal policy all around the map.
By the way, I don’t think that fiscal policy is completely irrelevant. Fiscal policy in the US had an important job of helping people through a tough time, which is nothing to balk at. Fiscal policy (broadly speaking, to include taxes and regulation) also has important long-run effects on saving, investment, and consumption that can not be ignored. But as a counter-cyclical measure tasked with moving monetary expenditures (final sales of domestic product, for example) to the long-run trend, fiscal policy will nearly always come up short. If you read this from Arnold Kling, he is in the camp that believes number three…which is pretty much where I’m at as far as using fiscal policy as stabilization policy.
Krugman counters Beckworth’s suggestion that quantitative easing worked during the Great Depression
But in the 30s, we were mainly talking about ending expectations of deflation, or at most creating expectations of a rise in the price level to where it was before the Depression; remember that even in 1938, prices were well below 1929 levels:
That’s very different from trying to create expectations of inflation looking forward with no actual deflation in our past.
So yes, the US experience of the 30s is useful to consider. But I don’t see how it engenders easy optimism about the effectiveness of quantitative easing now.
So lets start from what we all agree on.
A credible promise to induce inflation will lead to recovery.
Now it would seem that Paul doubts the ability of Fed to actually create this inflation since the high level of unemployment we are facing is inherently disinflationary.
However, isn’t this equivalent to saying “I don’t think the Fed can dramatically reduce unemployment because doing so would require that it do something that would dramatically reduce unemployment and I don’t think the Fed can do that”
Moreover, whatever you think about market rationality, the markets really are key here because the markets set the prices. To borrow a tem from Paul, there is no such thing as Immaculate Depression.
If asset prices do in fact start to rise in expectation of inflation. If real interest rates do in fact turn negative. If the dollar does indeed decline. Then these forces will encourage consumers and businesses to spend because consumers and businesses have to respond to the prices that they actually face, not the prices that we might think fundamentals support.
We saw all of those movements in response to mere talk about QE2. This strongly suggests that the Fed does have the credibility to induce inflation expectations and that prices will respond to Fed promises.
Mike Konczal has a cute response to David Robert’s notion of Climate Hawks
I also like it because the flip-side of it, climate doves, are the right representation for those who acknowledge warming but fail to see serious problems about it. Usually the answer is couched in how growth will fix every single imaginable problem, even problems we are already having trouble dealing with in rich countries that will only get much, much worse (changing nature of water collection, massive global population displacement, flooding and natural disasters, etc.). “Hey, let’s just keep doing what we were doing, and we’ll be so rich and happy things will just take care of themselves” is the response of climate doves, and it’s the response of doves everywhere on all dovish topics.
But that kind of naïvety won’t work for serious climate hawks. And we are very serious, and deserve to have the debate framed around us, because we are climate hawks!
I think that’s about right and for the same reasons I leaned against the Iraq War, I lean against aggressive climate action. Its also the same reason I lean against aggressive fiscal consolidation and that I lean in favor of loose monetary policy. On climate, war, budget and inflation I am a dove.
The issue in my mind is that there are actual existing problems in the world today. Yet, the hawks of various breeds are arguing that we should take actions which will make those problems worse in the hopes that we will prevent some larger problem down the road.
As always I question their ability to foresee the real problems that will occur down the road and think that people are generally overconfident their long range forecasts.
Are you sure Iraq is going to use weapons of mass destruction because this could go very badly in the short term and we need be fairly confident that there is a long term win here. We saw how that worked out.
Again, I don’t doubt the sincerity of the hawks. I think they really did believe they were making the world a better place. However, I think there was a tendency to focus on this big PowerPoint-ready existential risk as opposed to the small on the ground risks that were more likely and closer at hand.
Here we have to ask, are you sure that reducing carbon emissions is necessary to forestall the negative effects of climate change. Because, this could turn out very badly in the short term and we need to be fairly confident that there is a long term win here.
I have people telling me that using current technology they could rig up devices to cool the planet at a much lower cost. Are they right? I don’t know. But if they are not insane then are we certain that 100 years of active research into the subject won’t yield low cost solutions?
People are also telling me that the greatest risks are flooding and the necessity of relocating hundreds of millions of people. However, we built housing for 5 billion people over the last century. Can we not do the same over the next?
So you can see I am skeptical that you have accurately identified the risk that will be present 100 years into the future. I do know, however, that to keep India and China from increasing carbon emissions would impose some immediate constraints today. Perhaps those can be overcome but they cannot be overcome at zero cost. And, of course, development in China and India is extremely important.
It is clear that restricting emissions today will cause hardship. It is not clear that tomorrow we will have anything to show for it.
Robin Hanson and Bryan Caplan have noted recently that when it comes to regulation people are biased against large producers, and that this doesn’t make any sense. In most markets this is certainly the case. For instance, there is no reason why a locally owned mom-and-pop grocery store should be less regulated than Walmart, and yet Walmart faces much greater opposition when they want to build in a community. However, when it comes to music and other entertainment laws and regulations favoring small producers can be efficient.
The optimal copyright policy would ensure that any possible products for which total benefits (social plus private) are greater than total costs are created. For large producers, e.g. the most popular artists, the profits they receive are more likely to exceed the minimum amount needed to incentivize them to create. For small artists this constraint is much more likely to be binding, and products with positive net value are unlikely to be created due to suboptimal copyrights.
Imagine, for instance, how much additional music would be created if small artists could perfectly price discriminate, meaning they could charge the maximum that each individual consumer would be willing to pay. Now consider how much more superstars would be willing to create if they could do the same. The latter will be much less marginal creation due to wealth effects -meaning the richer artists are the more they’ll want leisure over work- and because they are more likely to be producing closer to a quality adjusted full capacity.
This suggests that if it increases profitability of small producers at the expense of large ones, illegal downloading may be welfare enhancing. A new NBER paper in fact supports this notion. The authors argue that music piracy decreases the demand for recorded music from all artists, but increases the demand for live performances for small artists but not large, well-known artists. Here is the abstract:
Changes in technologies for reproducing and redistributing digital goods (e.g., music, movies, software, books) have dramatically affected profitability of these goods, and raised concerns for future development of socially valuable digital products. However, broader illegitimate distribution of digital goods may have offsetting demand implications for legitimate sales of complementary non-digital products. We examine the negative impact of file-sharing on recorded music sales and offsetting implications for live concert performances. We find that file-sharing reduces album sales but increases live performance revenues for small artists, perhaps through increased awareness. The impact on live performance revenues for large, well-known artists is negligible.
Given the logic above, these results suggest that illegal downloading may be welfare enhancing.
